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Monday, June 04, 2012

I HAVE MY SUSPICIONS

A famous quote by Colonel Troutman in the movie Rambo, but also my feeling today after Friday's action in GOLD. Here we have a significant down trend that has reached a level in price that has to be obvious even to the 7 year olds asking their parents how much gold they are buying. We have held this level that is so very important. We get this huge up move in Gold and Silver does not come along for the ride. It did rise but did not break out above the near term highs like this did. I am not long this market but if I were, I would have bailed out at the close Friday when I saw what to me looks like a short squeeze.

I also would not short this here right into this very significant price level. This price level is likely to determine the next several years in this market. If it holds and the Gold bugs can get this moving again, who knows how far up it could go. If it breaks the reverse scenario is true, who knows how far it could drop. This is basically what they call an inflection point. Readers know that big picture I think we are heading back down probably under $500 here just like any other commodity would revert back to the mean. I have absolutely no idea when it will happen, but I do think we are on the way now. As to the current state of affairs and what to do right here, this is unclear to me. If we were to base here some more and things start to turn back up, then we get a breakout like Friday, we could be in business on the long side. I certainly see no short scenario at the present time. I will not let my big picture view which is basically an opinion, cloud my judgement or in any way effect how I trade this market short term. I am thinking the odds favor a pullback, then more upside, but a day like this makes me very suspicious. I think someone had to cover a big short here.

One of my favorite readers posed a question to me this weekend that was interesting. Would I rather buy 30 year Bonds at these almost zero rates and hold them to maturity or buy Gold and hold it for the same amount of time? The answer of course is neither, they are both bad decisions. However, it does depend on what your goals are. If your goal is a speculative gain, and you are willing to take a very big risk, Gold would be the clear winner here. The upside for Bond prices is limited here mostly because once they were to get into negative yield territory, we would really have to have Armageddon for that to have any gain at all. Gold could go up or down without these same types of restrictions. Whether you are bullish or bearish on Gold, that market will fluctuate more in most circumstances.

If your goal is strictly preservation of capital, Bonds are the clear winner here. Unless the US Government disappears, your principle is guaranteed. You will likely lose some purchasing power due to inflation especially with rates this low, but your net amount of investment in dollars will be preserved. Gold on the other hand could go up or down a huge amount, so although if the world ends and history proves that the "different this time" argument Gold bugs are putting forth becomes reality, you could have a huge windfall. If history prevails and Gold does what it always has done, you will likely lose a considerable amount of money in that investment. It really boils down to what your objectives are for the investment, speculative or preservation of capital.

I hate answering questions with it depends, but it is the correct way to answer this one. No matter how sure you are that Gold is going to soar, there are no guarantees in life other than the referees screwing whatever team my dad is rooting for in a sports event. It is amazing to me that even in the instances where his teams lose by 30 points it is still the referees fault. That apparently is a guarantee.

I do think we are in a bounce zone in the Bernanke's here but I am not buying into this dip.

2 comments:

Anonymous
said...

ChrisYou said that in the Bonds your principle is guaranteed but is it really? At today's prices you're paying $1520 for a 30 year bond that has a face value of only $1000That means what you're holding is a guaranteed loss of $520 per bond (33%)all other things being equal.That's the only reason that gold seems more appealing over a 30 year run. It's all hypothetical of courseDon in Virginia

Yes it is guaranteed by the US government what is not to understand about that. If you think the government will fail and cease to exist then I suppose the guarantee could be defaulted on. If you buy $100,000 of bonds at 1.5% you are guaranteed you 100k plus 1.5% per year if you hold for the full term. What is unclear about that?

I really urge caution to this type of paranoia thinking. You are free to bet on the it is different this time argument, we will be betting against each other on this every single time.

How in the hell could you be guaranteed a 33% loss, you are guaranteed the return percentage on the coupon?

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